Financial Analysis            

Executive Summary

The present paper is a detailed ratio analysis carried out for Norfolk Southern Corporation and CSX Corporation for the fiscal year ended 2013. The financial statements used for ratio analysis are provided in Appendix 1. The ratio analysis was carried out to understand the relative strengths and weaknesses of the company with respect to profitability, short-term liquidity and financial leverage.

Norfolk Southern Corporation

Norfolk Southern Corporation, together with its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods. . The company was founded in 1883 and is based Norfolk, Virginia.

As of December 31, 2014, it operated approximately 20,000 miles of road in 22 states and the District of Columbia. The company also operates scheduled passenger trains; transports overseas freight through various Atlantic and Gulf Coast ports; and provides logistics services. In addition, it provides bimodal truckload transportation services primarily utilizing Road-Railer trailers, a hybrid technology that facilitates over-the-road and on-the-rail transportation in the eastern United States, as well as in Ontario and Quebec through a network of terminals. Further, the company engages in the acquisition, leasing, and management of coal, oil, gas, and minerals; development of commercial real estate; telecommunications; and leasing or sale of rail property and equipment.

 

 

CSX Corporation

CSX Corporation, together with its subsidiaries, provides rail-based transportation services in the United States and Canada. The company was founded in 1978 and is based in Jacksonville, Florida.

It offers traditional rail services, and transports intermodal containers and trailers. The company transports crushed stone, sand and gravel, metal, phosphate, fertilizer, agricultural, automotive, paper, and chemical products; and coal, coke, and iron ore to electricity-generating power plants, steel manufacturers etc. It also provides intermodal transportation services through a network of approximately 50 terminals transporting manufactured consumer goods in containers in the eastern United States, as well as performs drayage services, including pickup and delivery of intermodal shipments; and trucking dispatch services. The company operates approximately 21,000 route mile rail network, which serves various population centers in 23 states east of the Mississippi River, the District of Columbia, and the Canadian provinces of Ontario and Quebec, as well as owns and leases approximately 4,000 locomotives. It also serves production and distribution facilities through track connections.

Common Size Income Statement

The common size income statements for the two firms are as shown below:

From the common size Income Statements it is evident that Norfolk Southern Corporation has a marginally higher operating margin due to marginally lower operating expenses as percentage of revenue compared to CSX Corporation. However the EBT margin and the Net Profit Margin of Norfolk Southern Corporation is much higher than that of CSX Corporation primarily due to the strong other income of Norfolk Southern Corporation. According to the management discussion section, the other income of Norfolk Southern Corporation was boosted by a one-time gain of $97 million from land sale in Michigan and also high net returns earned from corporate owned life insurance (COLI).

It is important to note that CSX had a lower fuel expense as percentage of revenue compared to Norfolk primarily due to higher improvement in network efficiency and fuel savings initiatives such as the ONE Plan leading to a decrease in fuel expenses. Again both the firms witnessed higher labor expenses due to increase in pay rates and incentives and stock-based compensation. Thus

Although interest expense as percentage for both the firms was similar the one-time gain from land sale for Norfolk boosted its EBT margin and Net profit margin to 26.4% and 17.0% compared to 24.3% and 15.5% for CSX Corporation. With respect to revenue both the firms witnessed a revenue decline in coal segment due to decrease in carload volume and lower average revenue per unit caused by lower pricing. The other revenue segments such as Intermodal, general merchandise reflects similar trends for both the firms in terms of growth in volume and average revenue per unit.

 

 

Ratio Analysis

The key ratios analyzed for the two firms are:

  • Return on Equity
  • Return on Assets
  • Financial Leverage
  • Current Ratio

 

Return on Equity

The Return on Equity is the most commonly tracked metric as it measures the rate of return generated by the firm on the equity investment. It is defined as

ROE = Net Income/Average Shareholders’ Equity

Thus ROE for CSX = 1864/(10504 + 9136)/2 = 18.98%

ROE for Norfolk Southern = 1910/(11289 + 9760)/2 = 18.15%

From the ratio analysis it is evident that CSX Corporation has a stronger ROE compared to Norfolk Southern Corporation implying the superior ability of CSX to deliver rate of return on equity investment. The high ROE of CSX despite a lower profit margin in 2013 indicates stronger efficiency of the company’s management in utilizing the equity investment to generate returns for the equity shareholders. Another factor contributing to the higher ROE is the relatively higher financial leverage of CSX compared to Norfolk Southern Corporation.

Return on Assets

The Return on Assets measures the rate of return generated on the dollar assets of a firm. In other words it measures the ability of a firm to generate rate of return on dollar assets. It is defined as

ROA = Net Income/Average Total Assets

ROA for CSX = 1864/(31782 + 30723)/2 = 5.96%

ROA for Norfolk = 1910/(32483 + 30342)/2 = 6.08%

From ratio analysis it is evident that Norfolk Southern Corporation has a stronger ability to generate rate of return on its assets compared to CSX Corporation. This is evident from the fact that while both the firms have almost same amount of average assets in 2013, Norfolk Southern Corporation’s stronger net profit margin has translated to a higher ROA for the firm. The aggressive capital expenditure incurred by CSX in 2013 to maintain and improve its existing infrastructure and to position itself for long-term growth through expanding network and terminal capacity has resulted in strong increase in asset base for the company. The capital expenditures incurred by CSX, as noted by the management, are expected to provide operational benefits going forward. However this reduced the ROA in the current year which is expected to improve going forward.

Financial Leverage

The financial leverage is a measure of the financial risk in the form of bankruptcy risks arising due to use of debt in capital structure to finance asset purchases. The higher is the financial leverage for a firm, higher is the use of debt to finance asset purchases and hence higher is the financial risk for the firm. It is defined as

Financial Leverage = ROE – ROA

Financial Leverage for CSX = 18.98% – 5.96% = 13.02%

Financial Leverage for Norfolk Southern = 18.15% – 6.08% = 12.07%

It also measures the extent to which ROE has been boosted by use of debt in capital structure as higher levels of debt reduce the equity portion of the capital structure.

The higher financial leverage for CSX clearly reveals that the firm has been higher levels of debt to finance asset purchases which in turn has reduced the equity portion and boosted the ROE. Thus despite Norfolk Southern Corporation having a higher ROA, the higher financial leverage of CSX resulted in a higher ROE for CSX. The balance sheet of CSX reveals that a significant portion of the liabilities in the form of casualty, environment and other reserves. Compared to $166 million for casualty and other claims for Norfolk Southern, CSX has a combined $451 million in the form of casualty, environment and other reserves in the liability section of the balance sheet. Furthermore CSX has a higher level of long-term debt compared to Norfolk Southern implying that CSX has been primarily using debt for capital expenditures and hence the firm has a relatively higher financial risk of bankruptcy.

Current Ratio

The current ratio is a measure of short-term liquidity of a firm. It measures the ability of a firm to meet its short-term obligations with its short-term assets. It is defined as

Current Ratio = Current Assets/Current Liabilities

Current Ratio for CSX = 2602/2424 = 1.07

Current Ratio for Norfolk Southern = 3075/2305 = 1.33

The ratio analysis shows that Norfolk Southern Corporation has a stronger short-term liquidity position as indicated by its higher current ratio. The analysis of the balance sheets of CSX and Norfolk Southern Corporation reveals that CSX has a significantly lower amount of cash and cash equivalents primarily due to higher use of cash in capital expenditures. The high use of cash and cash equivalents in capital expenditures, share repurchases and dividends is also evident from the management discussion section of the annual report. Again the high level of current liabilities is due to the labor and fringe benefits payable and the casualty, environment and other reserves of CSX Corporation. Consequently CSX has a weaker short-term liquidity position compared to Norfolk Southern Corporation.

Conclusion

The ratio analysis shows that while CSX has a superior ROE compared to Norfolk, the high ROE of CSX is due to a high financial leverage implying higher bankruptcy risks for the firm. On the other hand Norfolk has a superior ROA, lower financial leverage, higher net profit margin and a higher current ratio implying that the financial performance of Norfolk Southern is superior to the performance of CSX.

 

 

 

 

 

 

Appendix 1: Financial Statements

Norfolk Southern Corporation and Subsidiaries  
Consolidated Balance Sheets  
Figures in $ millions  
2013 2012  
Assets:  
Current Assets  
Cash and Cash equivalents 1443 653  
Short-term investments 118 15  
Accounts receivables -net 1024 1109  
Materials and supplies 223 216  
Deferred income taxes 180 167  
Other current assets 87 82  
Total current assets 3075 2242  
 
Investments 2439 2300  
Properties less accumulated depreciation 26645 25736  
Other assets 324 64  
Total assets 32483 30342  
 
Liabilities and stockholders’ equity  
Current Liabilities:  
Accounts Payable 1265 1362  
Short-term debt 100 200  
Income and other taxes 225 206  
Other current liabilities 270 263  
Current maturities of long term debt 445 50  
Total current liabilities 2305 2081  
 
Long term debt 8903 8432  
Other liabilities 1444 2237  
Deferred Income Taxes 8542 7832  
Total Liabilities 21194 20582  
 
Stockholders’ equity  
Common Stock 310 315  
Additional paid-in capital 2021 1911  
Accumulated other comprehensive loss -381 -1109  
Retained Income 9339 8643  
Total Stockholders’ equity 11289 9760  
Total Liabilities and Stockholders’ Equity 32483 30342  
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
Figures in $ millions except per share amount
2013 2012 2011
Railway operating revenues 11245 11040 11172
Railway operating expenses:
Compensation and benefits 3002 2960 2974
Purchased services and rents 1629 1604 1610
Fuel 1613 1577 1589
Depreciation 916 916 862
Materials and other 828 859 924
Total railway operating expenses 7988 7916 7959
Income from railway operations 3257 3124 3213
Other income-net 233 129 160
Interest expense on debt 525 495 455
Income before income taxes 2965 2758 2918
Provision for income taxes 1055 1009 1002
Net Income 1910 1749 1916
Per share amounts:
Net Income
Basic 6.1 5.42 5.52
Diluted 6.04 5.37 5.45

 

 

 

 

 

 

 

CSX Corporation
Consolidated Balance Sheets
Figures in $ millions
2013 2012
Assets:
Current Assets
Cash and Cash equivalents 592 784
Short-term investments 487 587
Accounts receivables -net 1052 1114
Materials and supplies 252 274
Deferred income taxes 155 119
Other current assets 64 75
Total current assets 2602 2953
Properties -net 27291 26050
Investment in Conrail 752 695
Affiliates and Other Companies 546 511
Other Long term assets 591 514
Total assets 31782 30723
Liabilities and stockholders’ equity
Current Liabilities:
Accounts Payable 957 948
Labor and Fringe Benefits Payable 587 468
Casualty, Environment and Other Reserves 151 140
Current maturities of long term debt 533 780
Income and Other Taxes Payable 91 169
Other Current Liabilities 105 140
Total current liabilities 2424 2645
Casualty, Environment and Other Reserves 300 337
Long term debt 9022 9052
Deferred Income Taxes 8662 8096
Other Long-term liabilities 870 1457
Total Liabilities 21278 21587
Stockholders’ equity
Common Stock 1009 1020
Other Capital 61 28
Retained Earnings 9936 9010
Accumulated other comprehensive loss -523 -936
Non-controlling minority interest 21 14
Total Stockholders’ equity 10504 9136
Total Liabilities and Stockholders’ Equity 31782 30723

 

CSX Corporation
Consolidated Statements of Income
Figures in $ millions except per share amount
2013 2012 2011
Revenues 12026 11763 11795
Expense
Labor and fringe 3138 3020 3073
Materials, Supplies and Others 2275 2156 2229
Fuel 1656 1672 1668
Depreciation 1104 1059 976
Equipment and Other Rents 380 392 379
Total railway operating expenses 8553 8299 8325
Operating Income 3473 3464 3470
Other income-net 11 73 22
Interest expense on debt -562 -566 -552
Income before income taxes 2922 2971 2940
Income Tax Expense -1058 -1108 -1086
Net Income 1864 1863 1854
Per share amounts:
Net Income
Basic 1.83 1.8 1.71
Diluted 1.83 1.79 1.7